mountain in a wingsuit. Image: Thomas Senf/Euro-Newsroom
The McKinsey Global Institute this month released the third in as series of reports on global leverage in the wake of the GFC.
The report, titled “Debt and (not much) deleveraging”, found as the private sector has deleveraged in the years since 2007 the public sector has – as a result of bail outs and slower growth – leveraged up.
Given that the GFC was largely sourced in the unsustainable debt burden of households in the US, Ireland, the UK and elsewhere the authors also looked at current household indebtedness around the world.
The report found that the size and nature of Australian cities is correlated with high household debt levels across the globe. But the authors found that Australia is one of seven countries that, “have household debt that may be unsustainable”.
Use of “may” is clearly aimed at not startling the horse but the intent remains clear.
The authors note that high levels of urbanisation leads to high household debt:
Across countries, urbanisation patterns partly explain differences in household debt levels: we find that countries with one megacity or a few large urban
agglomerations, rather than multiple large cities, have higher real estate prices in the central city and therefore higher levels of household debt.
But while the correlation with urbanisation argues for higher sustainable debt in Australia the authors go further and look at a number of ratios to determine indebtedness. They find Australia, along with the Netherlands, South Korea, Canada, Sweden, Malaysia, and Thailand, “appear to have household debt levels that would make them most vulnerable”.
They note that these 7 nations, “debt-to-income ratios are not only the highest, but they also have grown significantly since 2007”. These nations, with the exception of Canada, also “have some of the highest debt service ratios in our sample.
While the figures “do not signal imminent crises” they do suggest potential pitfalls ahead.
In light of the RBA rate cut last week, and the signs that it is already re-igniting the housing market, the report sounds a warning.
Critically, in the context of an Australian economy searching for a growth pulse and still stuck with the twin engines of mining boom or housing led growth, the report highlights the risks these high levels of debt pose.
The creditworthiness of borrowers, the ability of lenders to assess risk, and the state of the macroeconomy will all influence the outcome. Nonetheless, these countries should, at a minimum, be monitoring the situation very carefully.
No wonder the RBA keeps talking about joint efforts with APRA to implement macro-prudential rules.